Friday’s Brexit reaction qualifies for the “interesting times” curse, but cooler heads will prevail. This is political turmoil that is affecting markets. It happens.
Americans don’t have a handle on their own political turmoil, and far be it from me, or frankly any other American, to suggest we know what is the best approach for British citizens and their British politics.
But politics it is. And it will work itself out either way, despite the doomsaying media.
I could loosely make a case for Brexit or Remain, and am confident the markets will figure out that either way the UK will make it work. In my Post Brexit reading marathon I’ve found some good pieces on both sides and share with you the following links below and a few excerpts, as they are among the best I’ve seen.
We would do well to remember, as noted in my last few Crisis Posts, This Too Shall Pass. Volatility reigns for now, again. My bigger concern is for the unfortunate Americans who have unwittingly bought Target Date funds either in their 401ks or their independently managed investment portfolios. It’s one thing to consciously decide to be 35-45% out of your home currency – our portfolios reflect that we do not share that view. It’s quite another to have been led there, lemming-like by a “decision” to blithely follow the “easy” route. If Brexit leads to a real crisis in the EU, those Target Date funds will look a whole lot worse before they look like a prudent investment. They are not a prudent investment for any US investor who does not know about his or her currency exposure, or does not choose to be a “global” investor.
‘We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising a new dominance from Brussels. Certainly we want to see Europe more united and with a greater sense of common purpose. But it must be in a way which preserves the different traditions, parliamentary powers and sense of national pride in one’s own country; for these have been the source of Europe’s vitality through the centuries.’
* * *
Those are the words with which Prime Minister Margaret Thatcher set in motion the lunge for liberty that Britain has just taken. She was speaking, in September 1988, to the College of Europe at Bruges.
Yes, there’s a lot of disagreement about the economic consequences of Brexit. But remember that Britain is still a member of the IMF, the World Bank, G-7, G-20, the WTO, NATO, and so on.
Veteran Wall Street economist Robert Sinche wrote a note to clients in the early evening of the vote that there was a high probability that Brexit would win. He wrote: “most analysts have overestimated the negative impact of a leave vote as the UK has been a marginal member of the EU on/off for many decades.” Brave chap. But I agree.
And we should also remember that the Bank of England — a better operation than the European Central Bank — will still be in business, as will the British pound sterling.
The great claim by Brexiteers is that because Britain buys more from Europe than vice versa, economic rationality means that a future British government will easily secure a deal that avoids almost all barriers to trade while at the same time allowing British firms to avoid costly and onerous EU regulations and permits British labour markets to be sealed to EU workers at will. If some Europeans have the bad manners to cut up rough, Brexiteers assert, then big boys such as the German car-makers will soon step in and impose order, as they wish to carry on selling BMWs and Volkswagens to British motorists.
This claim suffers from a couple of problems, starting with relative scale. To simplify and exaggerate, your blogger buys more from Safeways than Safeways buys from him, and yet does not set terms and prices in that trading relationship. Britain is a hefty country by European standards, to be sure, but some 45% of its exports go to the rest of Europe, while about 7% of other EU countries’ total exports are bought by Britain.
The UK has decided to leave the EU. It’s a strange vote given how little support there was from reputable economic experts. The estimates of the economic impact of Brexit were virtually all negative. This makes sense given that leaving the EU only makes trade more difficult, labor less mobile and most things more costly. It’s actually hard to come up with reasonable long-term positive outcomes here. As Oxford and theLondon School of Economics both noted, the risks here are asymmetric to downside. But the risks aren’t huge as worst case scenarios are in the -3.5% GDP range. So let’s put some of this in the right perspective:
* The UK is just 4% of global GDP. Even in a worst case scenario this economy is not large enough to derail the global economy. If they experience something like a 3.5% decline in GDP then it will be bad for the UK, but it will be a pimple on the rear-end of the global economy.
* I downplayed China (correctly) last year and I would downplay this event significantly more. For perspective, China is 4 times larger than the UK and their economic slowdown has had relatively modest global impacts.
* Although the Brexit vote is likely to be ratified this process will take YEARS to play out. The renegotiation of trade treaties and the actual exit from the EU will require huge amounts of red tape removal. This will not be a fast process and the negative impact will be muted further due to the slow process of the exit. This means that any negative impact here will be long, drawn out and appear more muted due to the slow process of the exit.
The Brexit campaign started as a cry for liberty, perhaps articulated most clearly by Michael Gove, the British justice secretary (and, on this issue, the most prominent dissenter in Mr. Cameron’s cabinet). Mr. Gove offered practical examples of the problems of EU membership. As a minister, he said, he deals constantly with edicts and regulations framed at the European level—rules that he doesn’t want and can’t change. These were rules that no one in Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they become the law of the land. Much of what we think of as British democracy, Mr. Gove argued, is now no such thing.
Deals negotiated through the EU always move at the pace dictated by the most reluctant country. Italy has threatened to derail a trade deal with Australia over a spat about exports of canned tomatoes; a trade deal with Canada was held up after a row about Romanian visas. Brexit wasn’t a call for a Little England. It was an attempt to escape from a Little Europe.
Many British voters felt a similar frustration on security issues, where the EU’s leaders have for decades now displayed a toxic combination of hunger for power and incompetence at wielding it.
The EU has become a coalition of the unwilling, the place where the finest multilateral ambitions go to die. Britain’s network of embassies will now go into overdrive, offering olive branches in capital after capital. Britain wants to deal, nation to nation, and is looking for partners.
Mr. Gove has taken to borrowing the 18th-century politician William Pitt’s dictum about how England can “save herself by her exertions and Europe by her example.” After Mr. Cameron departs and new British leadership arrives, it will be keen to strike new alliances based on the principles of democracy, sovereignty and freedom. You never know: That might just catch on.
If the people — usually a repository of common sense and practicality — do something that appears neither sensible nor practical, then it forces a period of long and hard reflection. My own politics is waking to this new political landscape. The same dangerous impulses are visible, too, in American politics, but the challenges of globalization cannot be met by isolationism or shutting borders.
The center must regain its political traction, rediscover its capacity to analyze the problems we all face and find solutions that rise above the populist anger. If we do not succeed in beating back the far left and far right before they take the nations of Europe on this reckless experiment, it will end the way such rash action always does in history: at best, in disillusion; at worst, in rancorous division. The center must hold.